Default Bets Emerge as Minister’s Exit Exposes Ukraine Turmoil

Less than three months after Ukraine restructured $15 billion of debt, investors are starting to doubt the government can avoid returning to the bargaining table.

The yield on the shortest-maturity bond surged above 10 percent on Wednesday after the resignation of Economy Minister Aivaras Abromavicius revealed growing dysfunction in the government as it tries to overhaul the economy to meet conditions for a International Monetary Fund bailout. The premium investors demand to hold notes due in 2019 over bonds due eight years later widened to the most since the November debt revamp.

“It’s hard to see anyone paying a 10 percent yield unless you think something can go really wrong,” said Vadim Khramov, a strategist at Bank of America Corp. in London. “Abromavicius’s resignation was a signal for many people that the reform agenda is stumbling, which means the IMF program might not properly continue.”

The minister’s departure exposed the risk that Ukraine’s government will fail to push through policies, including tax and pension reform, needed to unlock the aid the country needs to avoid a return to the brink of bankruptcy. The selloff in shorter-dated bonds shows investors see a growing likelihood the government will struggle to make future debt payments.

Disbursement Delay

The IMF has already delayed disbursement of about $3.4 billion in payments due to government wrangling. Abromavicius, a Lithuanian-born former fund manager, said he was resigning because other state officials were blocking efforts to remake the former-Soviet republic’s economy and institutions. Ukraine is “entering a serious political crisis,” Parliamentary Speaker Volodymyr Hroisman told reporters in Kiev on Thursday.

Notes maturing in Sept. 2019 traded 72 basis points above bonds dues in Sept. 2027 on Wednesday. That level indicates a “a decent chance” of debt restructuring, according to Khramov. The spread narrowed to 54 basis points at 3:14 p.m. in Kiev on Thursday after the yield on the 2019 bond dropped 13 basis points to 9.96 percent.

Investors typically demand higher yields on debt maturing further into the future, judging the risk of owning them to be greater over time. When this relationship becomes inverted, it indicates investors see a greater chance of restructuring, which often requires holders of shorter-dated debt to accept less favorable terms than other investors.